The main types of destructive dilution, so called because it actually enhances wealth destruction, are:
- Behavioral costs: Costs associated with the investor’s ability – or lack thereof – to control emotional and psychological reactions during the normal evolution of any investment cycle.
- Market timing: Investors’ attempts to buy at the “bottom” and sell at the “top” of market ranges within relatively short periods of time (below two years). Similar, and carrying equally destructive effects, to buying and selling mutual funds based on their past performance.
- Transaction costs: Costs incurred in the execution of trades, whether to implement a strategy or to disinvest; the more active an investor is, the more transaction costs will impact performance results.